Fed’s Tarullo: idea of big bank surcharge appealing

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By John Parry
NEW YORK, Nov 9 (Reuters) – U.S. Federal Reserve Governor Daniel Tarullo on Monday endorsed the idea of requiring big banks to hold more capital and renewed his suggestion that direct efforts to limit the size of banks may be worth considering.

Fed Chairman Ben Bernanke and other officials have raised the idea of a capital surcharge to prevent banks from getting so big that the government is compelled to prop them up in a crisis.

Tarullo did not comment on the outlook for the economy or interest rates in a speech on financial regulation.

The Fed governor said that in the debate over reforms to prevent a repeat of the recent financial meltdown, policy-makers could also focus on changes to the structure of the financial system as well as regulations.

He said both regulators and the financial industry were to blame for the crisis.

He renewed his suggestion that directly limiting the size of financial institutions may have merit.

Lawmakers are considering an overhaul of financial rules in the wake of a devastating crisis that triggered a painful recession, and Tarullo has been the Fed’s point person in that debate. A key U.S. Senator, Banking Committee Chairman Christopher Dodd, is expected to unveil his proposal on Tuesday.

The Fed itself has come under fire from many in Congress for failing to use its regulatory authority to prevent the risky lending and market practices that laid the groundwork for the crisis.

Tarullo said regulatory reform must extend supervision to any firm whose failure could threaten the broader financial system. Requiring bigger capital cushions and creating a mechanism to close down a failing firm in an orderly way are also important elements of reform, he said.

Answering questions following his speech, Tarullo said central banks needed to develop new tools to address asset bubbles.